Carnival Is Still Facing Many Tough Challenges

Covid-19 cases and hospitalizations are down sharply and fears of the virus have fallen a great deal. So the outlook of Carnival (NYSE:CCL) and CCL stock has certainly improved significantly in recent weeks.

Carnival (CCL) cruise ship on water in front of beach with chairs
Source: Flickr

Still, Carnival may still continue to have strong, residual, fundamental challenges from the coronavirus. Moreover, its recently reported fourth-quarter results were disappointing, while the Street also did not appear to be thrilled about its 2022 guidance. And finally, the company remains weighed down by a great deal of debt and an extraordinarily high share count.

Given these points, I recommend that investors sell CCL stock. But let’s dig into the details now.

Fewer Challenges From Covid-19, but Issues Will Linger

U.S. coronavirus “cases, hospitalizations, and deaths (are) down dramatically from their peaks just two months ago,” STAT News recently noted. However, the publication warned that analysis of U.S. wastewater and an increase in cases in Europe has some experts saying that the U.S. “needs to prepare for another spike in cases… even if it turns out to be a minor one.”

With fears of the coronavirus among most Americans down dramatically, I don’t expect such a spike to significantly harm airplane operators, hotel owners, and most other travel-oriented companies.

However, hundreds of people congregate in relatively close quarters on cruise ships. Additionally, as I’ve suggested in past columns, some consumers may fear that, in the event of a coronavirus outbreak on their ship, they will be forced to spend many days confined to their small rooms on the vessels.

And as I’ve also pointed out in the past, flying is basically essential for traveling to distant parts of the U.S., but cruise ships can easily be replaced with other forms of recreation.

Given these points, it’s not surprising that, while the number of people crossing Transportation Security Administration (TSA) checkpoints in recent days and weeks is generally around 80% – 90% of 2019 levels. Carnival’s fleetwide occupancy in March was only “nearing 70%,” the company reported on March 22.

If coronavirus case counts do meaningfully increase in the coming weeks, I predict that Carnival’s fleetwide occupancy levels could fall significantly as the demand for Carnival’s excursions drop.

Disappointing Q4 Results and 2022 Guidance for CCL Stock

On March 22, Carnival reported a Q4 per-share loss of -$1.66, 38 cents worse than analysts’ average outlook. Moreover, its revenue came in at $1.62 billion, $640 million below their mean estimate.

Carnival also predicted that it would generate a loss for all of 2022, further discouraging investors.

Meanwhile, creating a huge risk for Carnival, unlike its largest peers, the company reportedly has not hedged at all against fuel cost increases this year. As a result, if fuel costs stay high or rise much further in 2022, the company’s profit margins will probably be discouragingly low this year. That potential will likely put a great deal of pressure on CCL stock going forward.

Elevated Debt and a Huge Share Count

Another InvestorPlace columnist, Ian Bezek, recently noted that:

Carnival issued approximately 400 million shares of stock during the pandemic to raise capital. That added a ton of outstanding shares to the mix and greatly diluted prior owners. For another, the company took on a bunch of debt to survive during the downturn.

Consequently, Bezek reported, CCL stock is actually more expensive, when it comes to enterprise value, than it was before the pandemic. As he pointed out, the idea of the shares being worth more now than before the pandemic does not make sense.

The Bottom Line on CCL Stock

Carnival continues to face many challenges, as shown by its disappointing results and guidance. And on multiple fronts, things could get worse for the company before they get better.

Moreover, the shares are significantly overvalued. Because of these points, CCL stock is a sell for all investors.

On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Larry Ramer has conducted research and written articles on U.S. stocks for 15 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been PLUG, XOM and solar stocks. You can reach him on Stocktwits at @larryramer.


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